Patent protection has expired on the popular anti-depressant drug Lexapro. Its manufacturer, Forest Laboratories (FRX.N), is facing the typical revenue and profit dip that occurs when a brand-name drug goes generic. Analysts have lowered earnings estimates by almost 40% in the last 90 days. A StarMine Predicted Surprise of -10% indicates Forest Labs may miss even those lowered estimates when it reports fiscal first quarter earnings on July 23.
As seen in the chart below, the I/B/E/S consensus estimate (blue) has come down to 9 cents a share, from 15 cents a share 90 days ago. The StarMine SmartEstimate is slightly lower at 8 cents a share. Of the five most recent analysts who have updated their quarterly estimates, four have taken their estimates from above the consensus to below it, while only one has moved an estimate higher. The company has seen revenues (year over year) shrink by more than 20% in each of the last four quarters. The negative Predicted Surprise indicates that analysts may not be done lowering their estimates.
Source: Eikon
New product launch
The company launched two new products — Linzess (for irritable bowel syndrome) and Tudorza Pressair (a respiratory drug) — in the last year. In the most recent earnings conference call, Frank Perier, EVP of Finance, anticipated SG&A expenses of $1.75 billion for 2014, as the company promotes the new product launches. That would be the highest SG&A in the company’s history. Forest Labs needs these two drugs to be successes to justify those kinds of expenses, especially with the earnings losses from Lexapro going generic. The chart below shows how the company’s return on net operating assets has fallen drastically to -1.6% (which is far below the industry median of 18.6%) from over 85% and being far above the industry median just two years ago. Acquiring smaller pharmaceutical companies to augment the product line seems to be a popular trend, but the challenge is not overpaying for those assets in an attempt to out-bid competitors. Forest Labs, under pressure from investor Carl Icahn, is rumored to have entered the bidding war for cash-rich Elan Corp. (ELN), according to this Reuters News article.
Source: Datastream Professional/StarMine
Stock may not be cheap
As earnings have shrunk, the company forward 12M P/E ratio has increased to just over 40. Compare that to a 10 year median of 15 and it explains why the stock may appear expensive. The StarMine Relative Valuation (RV) model blends this metric with other commonly used valuation metrics (like enterprise value to sales and price to book) and assigns a score of 7 for Forest Labs, which puts it in the bottom decile of companies in the region.
Source: Datastream Professional/StarMine
As Forest Labs tries to replace the lost revenue from generics with new products, it faces yet more uncertainty. Chairman and CEO Howard Solomon is set to retire at the end of 2013, and the company is searching for a successor. In the immediate future, Forest Labs looks likely to miss quarterly earnings estimates.
SMARTESTIMATES AND THE PREDICTED SURPRISE %
SmartEstimates: StarMine Professional quantitatively analyzes the earnings estimate accuracy of sell-side analysts and uses this information to create proprietary
SmartEstimates®.SmartEstimates help you better predict future earnings and analyst revisions with estimates that place more weight on recent forecasts by top-rated analysts.
Predicted Surprise %: The Predicted Surprise% is the percentage difference between the SmartEstimate and the I/B/E/S consensus estimate. When SmartEstimates diverge significantly from consensus, it serves as a leading indicator of the direction of future revisions and/or surprises. In aggregate, this indicator gets earnings surprises directionally correct 70% of the time.
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